Aviation Strategy Issue No: 124 Jan/Feb 2008 Perfect storm or squalls? ith over 7,000 narrowbodies and widebodies on order, the man- CONTENTS Wufacturing backlog has reached epic proportions. At the same time airline economic prospects appear to be deteriorating and the Analysis subprime crisis is filtering throughout the global financial structure. This may not represent the "perfect storm" that Michael O'Leary of Ryanair has predicted, but it does presage some violent squalls. Global backlogs 1 The European LCC sector, which accounts for most of narrowbody backlog, is going to go through an interesting phase. Ryanair has left itself exposed to continued high fuel prices through not having hedged Consolidation of - in contrast to easyJet. Some of the smaller newcomers have more Europe’s charter industry fundamental problems - Vueling and SkyEurope appear to have failed to find a sustainable operating model and their attempts to expand • The integration of the TUI beyond their base airports - Barcelona and Bratislava/Budapest - have Travel Group and the evolution proved to be very cash-draining. of TuiFly Indian LCCs have transformed the domestic market - from 14m passengers five years ago to over 40m in 2007 - but multi-LCC com- • Other specialist petition on the main routes is just unsustainable (LCCs in Europe European charter airlines avoided direct competition in their developmental stages and even 2-8 today avoid it wherever possible). There is a possibility that some of the Indian airline backlog will be used for leasing ventures. The leasing companies themselves have some worries. Financing Briefing through securitisation products is becoming more difficult as lenders begin to worry about the underlying credit risk of the airline customers Southwest Airlines: and the accuracy of residual aircraft value predictions. There could be Low-cost pioneer in transition some attractively priced portfolios for sale over the next year. 9-15 In the widebody sector, the perpetual question is whether the Middle Eastern super-connectors' massive orderbooks can really be justified. The question remains unanswerable as long as they are Databases 16-19 underpinned by the oil wealth and political ambitions of their state own- ers. One concern might be that a tail-off in the construction boom starts Airline traffic and financials to deflate the volume of point-to-point traffic to the region. In any case, the scale of the competitive threat on Europe-Asia Regional trends routes means that the European network carriers have to get their North Atlantic strategies right. A major comfort is that the US Legacies, Orders although they have emphasised their international plans, have not yet made the investment commitment in new widebodies for this market. A longer-tem concern is that the “perfect storm”, that O'Leary says he would welcome, will provide the supply of widebodies at the price required to start a transatlantic operation. PUBLISHER GLOBAL BACKLOG BY CUSTOMER Narrowbodies Widebodies Europe 1,145 Asia 507 North America 874 Middle East 412 Aviation Economics Leasing companies 684 Europe 365 James House, 1st Floor China 626 Leasing companies 352 Asia 547 North America 226 22/24 Corsham Street Central/ South America 332 India 127 London N1 6DR India 288 China 111 Middle East 159 Central/South America 109 Tel: +44 (0) 20 7490 5215 Others/Undisclosed 373 Others/Undisclosed 106 Fax: +44 (0) 20 7490 5218 Source: ACAS 5,028 2,315 e-mail: [email protected] www.aviationeconomics.com Aviation Strategy Analysis Europe's charter industry consolidates into two giants ollowing the continued structural decline the merger with TUI can be seen as a very Aviation Strategy is published 10 times a year Fof the western European package holiday poor Plan B for First Choice. While it could be by Aviation Economics market, four large tour operators consolidat- said that the largely mainstream businesses ed into two giants in 2007: Thomas of TUI are complemented by the specialist Editor: Cook/MyTravel and TUI/First Choice. In the holidays and long-haul business that First Keith McMullan second part of our analysis of the European Choice has been building up, a more critical [email protected] charter industry, Aviation Strategy looks at assessment is that TUI brings a huge over- the new TUI Travel group and the handful of hang of vulnerable, low margin mainstream Contributing Editor: Heini Nuutinen other charter airlines in Europe. holidays to the new business. Pre-merger, TUI's margin of 2% contrasted markedly with Contributing Editor: TUI Travel the 5% at First Choice, and having to deal Nick Moreno once again with a wider portfolio of AIT busi- In the mid-1990s the European nesses is probably the last thing that First Sub-editor: Commission didn't allow Airtours (now known Choice's executives want to do. So while Julian Longin [email protected] as MyTravel) to acquire First Choice, but the First Choice has halved the number of short- EC now says that market conditions have haul holidays over the last few years, sud- Subscriptions: changed substantially since that decision, denly the new TUI Travel group has added a [email protected] and so permission was given for TUI and whole raft of mainstream package holiday Tel: +44 (0)20 7490 5215 First Choice to merge in early September businesses, such as the UK's Thomson 2007, when TUI Travel made a debut on the brand. Copyright: London stock exchange. Thomson is the market leader in the UK, Aviation Economics Now based in London, TUI Travel is with around a 25% market share in AIT pack- All rights reserved owned 51% by TUI and 49% by former First ages, but has been sluggish to respond the Choice shareholders. If the Thomas Cook new realities of the AIT industry. Thomson Aviation Economics Registered No: 2967706 Group is big, then TUI Travel is even bigger, has now, belatedly, started to change itself (England) with the group employing 48,000 staff world- from a mainstream tour operator into a com- wide, owning 3,600 travel agency outlets and pany that is a "one-stop-shop" for self- Registered Office: having revenue of €18bn, generated from assembling holidaymakers, and a €10m James House, 1st Floor 30m customers a year in 20 markets, who advertising campaign was launched in the 22/24 Corsham St London N1 6DR travel to more than 180 countries around the autumn of 2007 that promoted a variety of VAT No: 701780947 globe. But as with TCG, TUI Travel's merging properties and the Thomson website - but the ISSN 1463-9254 companies - TUI AG and First Choice difference in approach between Thomson Holidays - had different AIT strategies, and and First Choice is stark. The opinions expressed in this publica- tion do not necessarily reflect the opin- again in the short-term the new group is hav- Again, this has direct consequences on ions of the editors, publisher or contribu- tors. Every effort is made to ensure that ing to navigate tensions between the two for- the group's airlines. TUI Travel now has a the information contained in this publica- mer managements. Peter Long, CEO of First combined fleet of 141 aircraft (see table, tion is accurate, but no legal reponsibility is accepted for any errors or omissions. Choice prior to the merger and now CEO of opposite) - the 27 of First Choice Airways and The contents of this publication, either in TUI Travel, is adamant that the AIT market is 114 of TUI, the latter split between TUIfly (46 whole or in part, may not be copied, changing rapidly through the rise of the LCCs aircraft), Dutch carrier ArkeFly (five), French stored or reproduced in any format, print- ed or electronic, without the written con- and a reduction in demand for fixed duration carrier Corsairfly (six), Belgian airline Jetairfly sent of the publisher. package holidays, and that this attitude will (10), Thomsonfly (42) and Swedish-based have to spread through managements at the TUIfly Nordic (five). TUI also leases three various former TUI AG assets. ATR 42/72s and a single CRJ 900, and owns But given that First Choice had wanted to 40% of Moroccan LCC Jet4you. The largest sell off its mainstream business to Thomas former TUI AG airline in the UK is Cook or MyTravel as late as January 2007, Thomsonfly, which dates back to the 1960s Jan/Feb 2008 2 Aviation Strategy Analysis but which was relaunched as a "low cost TUI TRAVEL GROUP FLEET leisure airline" by TUI in 2004 before incor- porating Britannia Airways in 2005. It current- First Choice TUIfly ly operates a fleet of 42 aircraft out of Airways Thomsonfly TUIfly Jetairfly Corsairfly Nordic ArkeFly Coventry, Doncaster and Bournemouth, and F.100 1 carries around 8m passengers a year, but its A320-200 4 future is in some doubt (see below). A321-200 3 From the start of 2007 TUI had already A330 2 737-300 10 2 begun to integrate all its airlines under a sin- 737-400 4 gle brand - TUIfly - initially via the combining 737-500 2 1 of charter carrier Hapagfly (previously called 737-700 8 (20) Hapag-Lloyd until 2005) and LCC Hapag- 737-800 7 36 (26) 3 3 1 747-400 4 Lloyd Express (also known as HLX), which 757-200 13 17 2 was completed in April 2007. 767-200ER 1 1 The current TUIfly has a fleet of 46 aircraft 767-300ER 6 5 1 4 and increased capacity by 25% in summer 787-8 (12) (11) Total 27 (12) 42 46 (57)* 10 6 5 5 2007 compared with the previous year, with 13.5m passengers expected to be carried in Note: *Ordered by TUI AG the whole of 2007 (compared with 11.5m in an MoU with Lufthansa and Knauf to explore 2006).